Oil & Gas Industry
One of the eight core industries in India is the Oil and Gas industry. It has a huge influence on cost and decision making of all the important sections of the Indian economy. The growth of the Indian economy has high proximity with the energy demand which thus increases the importance of investment in this industry. Geopolitical tensions and the pandemic has had a huge impact on the oil & gas industry worldwide, and not only in India. Who can forget the stunning fall in the prices of crude oil when it traded at negative $40 per barrel on 20th April 2020?
Crude oil imports significantly affect the country’s oil import bill. With the fall in the prices, this import bill will reduce but the fluctuating prices become a sign of worry for domestic E&P (Exploration & Production) companies like ONGC, Petronet, Gail, etc. The graph below shows the decrease in domestic crude oil production over the years.
Upstream Segment- E&P Sector
The whole industry is divided into three segments: Upstream segment (extraction and production of crude oil), Midstream segment (storage, processing and transportation) and Downstream segment (refining, marketing and distribution)
Upstream segment is also known as Exploration and Production (E&P) sector. This segment is responsible to find and produce crude oil and natural gas. This includes searching for potential oil and natural gas fields, drilling exploratory wells and see if they have the potential to give back a good amount of oil and at last, recovering crude oil and natural gas to the surface. ONGC predominantly operates under this segment. A company which operates in all the three segments is known as Integrated Oil Companies (IOC).
About ONGC
State-owned Oil and Natural Gas Corporation is termed as a leader in the E&P segment in India. It was set up way back in 1955 under the leadership of Pandit Jawahar Lal Nehru. In 2010, this corporation was conferred with the status of Maharatna. They produce 72% of India’s total production of crude oil. Apart from oil, they also produce half of the gas which is produced in the country.
They have multiple subsidiaries in the form of ONGC Videsh Ltd, Mangalore Refinery Petrochemicals Ltd and join ventures with ONGC Tripura Power Company Lt, Indradhanush Gas Grid Limited, etc. During COVID-19 outbreak, Moody’s Investors Service downgraded their long-term issuer rating and with a negative outlook.
Crashed Q4 FY20 results
On June 30, ONGC reported their Q4 FY20 results which came as a shock to everyone. For the first time since reporting their financials from the year 2000, ONGC declared a net loss of Rs 3,098 crore as compared to a profit of Rs 4,226.5 crore declared in the previous quarter. Not only the bottom line, but their operating profit also fell by 30% to Rs 8,588 crore.
The fall in net profit was due to the accounting of the one-time impairment cost of Rs 4,899 crore. An impairment loss is considered when there is a reduction in the carrying amount of an asset due to a fall in its fair value. This news was greeted with a 4% slip in ONGC’s share price the next day. Thus, showcasing investor’s fear to continue investing in the company.
“Our weighted average cost of gas production is USD 3.75 per mmBtu and for newer projects in the deepsea, it is north of USD 5 per mmBtu. At current gas prices, we are losing money.” – ONGC Director (Finance) Subhash Kumar.
ONGC earned a net realization of $49 per barrel of crude. This was much below $61.93 what they realized a year back. This decrease, coupled with lower sales in the quarter, has deeply impacted the company’s profitability. This effect was not only because of the nationwide lockdown which was implemented by the Indian government but also because of the rising tensions between Arabia-led OPEC and Russia.
Return of Equity is one of the most important measures of profitability. If ROE is one, it indicates that a shareholder is getting a dollar of return for every dollar he invested. From the past three years, ONGC’s ROE has been consistently above 10%. For the year 2019-20, their ROE stood at almost 14% but this year it fell drastically to just above 5%. Return on Equity is calculated with the help of three other measures.
ROE = Return on Sales X Asset Turnover Ratio X Leverage
Even though the asset turnover ratio remained constant to the previous year, the return on sales was reduced by more than half. In 2018-19, return on sales was about 7.5%. This year, the same ratio fell to 2.4%. This return on sales tells how much profit is being produced per dollar of sales. Thus, decreasing ROS is a signal of decreased operational efficiency faced by the company this year.
Conclusion
After the fall of crude oil prices in March-April, WTI crude oil prices have risen lately to $41.41. This rise can be taken positively by the oil companies but the prices are yet to reach the level it was previous year. As the countries are fighting with the virus globally, one can expect more lockdowns in the near future.
Any disruption for the capital-intensive companies like ONGC can be daunting. Switching off and on these heavy machines might decrease productivity which can hurt companies financially. It will be interesting to see how the government will help this sector. As the national lockdown is removed, demand for oil is expected to go up once again. This increase in demand won’t be as high as it was in pre-virus times. People are still willing to go out only if necessary and not for tourism. It will be interesting to see how things unfold in this quarter for companies like ONGC amidst the pandemic.
